52011DC0885

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS Energy Roadmap 2050 /* COM/2011/0885 final */

1.
Introduction

People's well-being, industrial
competitiveness and the overall functioning of society are dependent on safe,
secure, sustainable and affordable energy. The energy infrastructure which will
power citizens' homes, industry and services in 2050, as well as the buildings
which people will use, are being designed and built now. The pattern of energy
production and use in 2050 is already being set.

The EU is committed to reducing greenhouse gas emissions to
80-95% below 1990 levels by 2050 in the context of necessary reductions by
developed countries as a group[1].
The Commission analysed the implications of this in its "Roadmap for moving to a competitive low-carbon
economy in 2050".[2] The "Roadmap to a Single European Transport Area"[3] focussed on solutions for the
transport sector and on creating a Single European Transport Area. In this Energy Roadmap 2050 the Commission explores
the challenges posed by delivering the EU's decarbonisation objective while at
the same time ensuring security of energy supply and competitiveness.
It responds to a request from the European Council[4].

The EU policies and
measures to achieve the Energy 2020 goals[5] and the Energy 2020 strategy are ambitious.[6] They will continue
to deliver beyond 2020 helping to reduce emissions by about 40% by 2050. They
will however still be insufficient to achieve the EU's 2050 decarbonisation
objective as only less than half of the decarbonisation goal will be achieved
in 2050. This gives an indication of the level of effort and change, both
structural and social, which will be required to make the necessary emissions
reduction, while keeping a competitive and secure energy sector.

Today, there is
inadequate direction as to what should follow the 2020 agenda. This
creates uncertainty among investors, governments and citizens. Scenarios in the
"Roadmap for moving to a
competitive low-carbon economy in 2050" suggest that if investments are postponed, they will cost
more from 2011 to 2050 and create greater disruption in the longer term. The task
of developing post-2020 strategies is urgent. Energy investments take time to
produce results. In this decade, a new investment cycle is taking place, as
infrastructure built 30-40 years ago needs to be replaced. Acting now can avoid
costly changes in later decades and reduces lock-in effects. The International
Energy Agency (IEA) has shown the critical role of governments and underlined
the need for urgent action;[7]
with the scenarios of the Energy Roadmap 2050 different possible pathways for
Europe are analysed more in depth.

Forecasting the
long-term future is not possible. The scenarios in this Energy Roadmap 2050 explore
routes towards decarbonisation of the energy system. All imply major
changes in, for example, carbon prices, technology and networks. A number
of scenarios to achieve an 80% reduction in greenhouse gas emissions implying
some 85% decline of energy-related CO2 emissions including from transport, have
been examined.[8]
The Commission has also analysed Member States' and stakeholders' scenarios and
views.[9]
Naturally, given the long time horizon, there is uncertainty associated to
these results, not least because they rely on assumptions which themselves are
not certain.[10]
It is impossible to anticipate whether an oil peak will come, since new
discoveries have occurred repeatedly; to what extent shale gas in Europe will
prove viable, whether and when Carbon Capture & Storage (CCS) will become
commercial, what role Member States will seek for nuclear power, how climate
action across the globe will evolve. Social, technological and behavioural
changes will also have significant impact on the energy system.[11]

The scenario
analysis undertaken is of an illustrative nature, examining the impacts,
challenges and opportunities of possible ways of modernizing the energy system.
They are not "either-or" options but focus on the common elements
which are emerging and support longer-term approaches to investments.

Uncertainty is a
major barrier to investment. The
analysis of the projections conducted by the Commission, Member States and
stakeholders show a number of clear trends, challenges, opportunities and
structural changes to design the policy measures needed to provide the
appropriate framework for investors. Based on this analysis, this Energy Roadmap
identifies key conclusions on "no regrets" options in the European
energy system. This makes it also important to achieve a European approach,
where all Member States share common understanding of the key features for a
transition to a low-carbon energy system, and which provides the certainty and
stability which are needed.

The Roadmap does not
replace national, regional and local efforts to modernize energy supply, but
seeks to develop a long-term European technology-neutral framework
in which these policies will be more effective. It argues that a European
approach to the energy challenge will increase security and solidarity and lower
costs compared to parallel national schemes by providing a wider and flexible
market for new products and services. For example, some stakeholders show potential
cost savings of up to a quarter if there was a more European approach for
efficient use of renewable energy.

2.
A Secure, Competitive and
Decarbonised Energy System in 2050 is possible

If, as seems likely, global energy markets
become more interdependent, the EU energy situation will be directly influenced
by the situation of its neighbours and by global energy trends. The results of
the scenarios depend notably on finalising a global climate deal, which would
also lead to lower global fossil fuel demand and prices.

Overview of scenarios[12]

Current trend scenarios

·
Reference scenario. The Reference scenario includes current trends and long-term
projections on economic development (gross domestic product (GDP) growth 1.7%
pa). The scenario includes policies adopted by March 2010, including the 2020
targets for RES share and GHG reductions as well as the Emissions Trading
Scheme (ETS) Directive. For the analysis, several sensitivities with lower and
higher GDP growth rates and lower and higher energy import prices were
analysed.

·
Current Policy
Initiatives (CPI). This
scenario updates measures adopted, e.g. after the Fukushima events following
the natural disasters in Japan, and being proposed as in the Energy 2020 strategy;
the scenario also includes proposed actions concerning the "Energy
Efficiency Plan" and the new "Energy Taxation Directive".

Decarbonisation scenarios (see graph 1)

·
High Energy Efficiency. Political commitment to very high energy
savings; it includes e.g. more stringent minimum
requirements for appliances and new buildings; high renovation rates of
existing buildings; establishment of energy savings obligations on energy
utilities. This leads to a decrease in energy demand
of 41% by 2050 as compared to the peaks in 2005-2006.

·
Diversified supply technologies. No technology is preferred; all energy sources can compete on a
market basis with no specific support measures. Decarbonisation is driven by
carbon pricing assuming public acceptance of both nuclear and Carbon Capture
& Storage (CCS).

·
High Renewable energy sources (RES). Strong support measures for RES leading to a very high share of
RES in gross final energy consumption (75% in 2050) and a share of RES in
electricity consumption reaching 97%.

·
Delayed CCS.
Similar to Diversified supply technologies scenario but assuming that CCS is
delayed, leading to higher shares for nuclear energy with decarbonisation
driven by carbon prices rather than technology push.

·
Low nuclear.
Similar to Diversified supply technologies scenario but assuming that no new
nuclear (besides reactors currently under construction) is being built
resulting in a higher penetration of CCS (around 32% in power generation).

Ten structural changes for energy
system transformation

In combination, the scenarios make it
possible to extract some conclusions which can help shape decarbonisation strategies
today which will deliver their full effects by 2020, 2030 and beyond.

(1) Decarbonisation is possible – and
can be less costly than current policies in the long-run

The scenarios show that decarbonisation of
the energy system is possible. Moreover, the costs of transforming the energy
system do not differ substantially from the Current Policy Initiatives (CPI)
scenario. The total energy system cost (including fuel, electricity and capital
costs, investment in equipment, energy efficient products etc) could represent
slightly less than the 14.6% percent of European GDP in 2050 in the case of CPI
compared to the level of 10,5% in 2005. This reflects a significant shift of
the role energy plays in society. Exposure to fossil fuel price volatility
would drop in decarbonisation scenarios as import dependency falls to 35-45% in
2050, compared to 58% under current policies.

(2) Higher capital expenditure and lower
fuel costs

All decarbonisation scenarios show a transition
from today's system, with high fuel and operational costs, to an energy system
based on higher capital expenditure and lower fuel costs. This is also due to
the fact that large shares of current energy supply capacities come to an end
of their useful life. In all decarbonisation
scenarios, the EU bill for fossil fuel imports in 2050 would be substantially
lower than today. The analysis also shows that cumulative grid investment costs
alone could be 1.5 to 2.2 trillion Euros between 2011 and 2050, with the higher
range reflecting greater investment in support of renewable energy.

The average capital costs of the energy
system will increase significantly - investments in power plants and grids,
in industrial energy equipment, heating and cooling systems (including district
heating and cooling), smart meters, insulation material, more efficient and low
carbon vehicles, devices for exploiting local renewable energy sources (solar
heat and photovoltaic), durable energy consuming goods etc. This has a widespread impact on the economy and jobs in manufacturing,
services, construction, transport and agricultural sectors. It would create
major opportunities for European industry and service providers to satisfy this
increasing demand and stresses the importance of research and innovation to
develop more cost-competitive technologies.

(3) Electricity plays an increasing role

All scenarios show electricity will have
to play a much greater role than now (almost doubling its share in final
energy demand to 36-39% in 2050) and will have to contribute to the
decarbonisation of transport and heating/cooling (see graph 2). Electricity
could provide around 65% of energy demand by passenger cars and light duty
vehicles, as shown in all decarbonisation scenarios. Final electricity demand
increases even in the High energy efficiency scenario. To achieve this, the power
generation system would have to undergo structural change and achieve a
significant level of decarbonisation already in 2030 (57-65% in 2030 and 96-99%
in 2050). This highlights the importance of starting the transition now and
providing the signals necessary to minimise investments in carbon intensive
assets in the next two decades.

(4) Electricity prices rise until 2030
and then decline

Most scenarios suggest that electricity
prices will rise to 2030, but fall thereafter. The largest share of these
increases is already happening in the reference scenario, and is linked to the
replacement in the next 20 years of old, already fully written-off generation
capacity. In the High Renewables scenario, which implies a 97% share for
renewable sources in electricity consumption, the modelled electricity prices
continue to rise but at a decelerated rate - due to high capital costs and
assumptions about high needs for balancing capacity, storage and grid
investments in this "near 100% RES power" scenario. For example,
RES power generation capacity in 2050 would be more than twice as high as
today's total power generation capacity from all sources. However, substantial
RES penetration does not necessarily mean high electricity prices. The High
Energy Efficiency scenario and also the Diversified Supply Technology scenario
have the lowest electricity prices and provide 60-65% of electricity
consumption from RES, up from only 20% at present. In this context, it has to
be noted that price in some Member States are currently artificially low due to
price regulations and subsidies.

(5) Household
expenditure will increase

In all scenarios, including current trends,
expenditure on energy and energy-related products (including for transport) is
likely to become a more important element in household expenditure, rising
to around 16% in 2030, and decreasing thereafter to above 15% in 2050[13]. This trend would also be
significant for small and medium-sized enterprises (SMEs). In the long term,
the rise in investment costs for efficient appliances, vehicles and insulation
becomes less important than the reduction of expenditure on electricity and
fuels. The costs include fuel costs as well as capital costs such as costs of
purchasing more efficient vehicles, appliances and refurbishments of housing.
However, if regulation, standards or innovative mechanisms are used to
accelerate the introduction of energy efficient products and services, this
would reduce costs.

(6) Energy savings throughout the system
are crucial

Very significant energy savings (see
graph 3) would need to be achieved in all decarbonisation scenarios. Primary
energy demand drops in a range of 16% to 20% by 2030 and 32% to 41% by 2050 as
compared to peaks in 2005-2006. Achieving significant energy savings will
require a stronger decoupling of economic growth and energy consumption as well
as strengthened measures in all Member States and in all economic sectors.

(7) Renewables rise substantially

The share of renewable energy (RES) rises
substantially in all scenarios, achieving at least 55% in gross final
energy consumption in 2050, up 45 percentage points from today's level at
around 10%. The share of RES in electricity consumption reaches 64% in a High
Energy Efficiency scenario and 97% in a High Renewables Scenario that includes
significant electricity storage to accommodate varying RES supply even at times
of low demand.

(8) Carbon capture and storage has to play
a pivotal role in system transformation

Carbon Capture and Storage (CCS), if commercialised, will have to contribute significantly
in most scenarios with a particularly strong role of up to 32% in power
generation in the case of constrained nuclear production and shares between 19
to 24% in other scenarios with the exception of the High RES scenario.

(9) Nuclear energy provides an important
contribution

Nuclear energy
will be needed to provide a significant contribution in the energy
transformation process in those Member States where it is pursued. It remains a
key source of low carbon electricity generation. The highest penetration of
nuclear comes in Delayed CCS and Diversified supply technologies scenarios (18
and 15% in primary energy respectively) which show the lowest total energy
costs.

(10)
Decentralisation and centralised systems increasingly interact

Decentralisation of the power system and heat generation increases due to more
renewable generation. However, as the scenarios show, centralized large-scale
systems such as e.g. nuclear and gas power plants and decentralised systems
will increasingly have to work together. In the new energy system, a new
configuration of decentralised and centralised large-scale systems needs to
emerge and will depend on each other, for example, if local resources are not
sufficient or are varying in time.

Link to global climate action

The scenario results for
decarbonisation scenarios all assume that global climate action is taken. First,
it is important to note that the EU's energy system needs high levels of
investment even in the absence of ambitious decarbonisation efforts. Second,
scenarios indicate that modernizing the energy system will bring high levels of
investment into the European economy. Third, decarbonisation can be an
advantage for Europe as an early mover in the growing global market for energy-related
goods and services. Fourth, it helps in reducing its import dependency and
exposure to the volatility of fossil fuel prices. Fifth, it brings significant
air pollution and health co-benefits.

However, in
implementing the Roadmap, the EU will need to consider progress, and concrete
action, in other countries. Its policy should not develop in isolation but take
account of international developments, for example relating to carbon leakage
and adverse effects on competitiveness. A potential trade-off between climate
change policies and competitiveness continues to be a risk for some sectors especially
in a perspective of full decarbonisation if Europe was to act alone. Europe
cannot alone achieve global decarbonisation. The overall cost of investment
depends strongly on the policy, regulatory and socio-economic framework and the
economic situation globally. As Europe has a strong industrial base and needs
to strengthen it, the energy system transition should avoid industry
distortions and losses especially since energy remains
an important cost factor for industry.[14] Safeguards against carbon leakage will have to be
kept under close review in relation to efforts by third countries. As Europe pursues the path towards greater decarbonisation,
there will be a growing need for closer integration with neighbouring countries
and regions and building energy interconnection and complementarities. The
opportunities for trade and cooperation will require a level-playing field
beyond the European borders.

3.
Moving from 2020 to 2050 –
Challenges and Opportunities
3.1.
Transforming the energy system

(a) Energy
saving and managing demand: a responsibility for all

The prime focus should
remain on energy efficiency. Improving energy efficiency is a priority
in all decarbonisation scenarios. Current initiatives need to be implemented
swiftly to achieve change. Implementing them in the wider context of overall
resource efficiency will bring cost- efficient results even faster.

Higher energy
efficiency in new and existing buildings is key. Nearly zero energy buildings should
become the norm. Buildings – including homes - could produce more energy than
they use. Products and appliances will have to fulfil highest energy efficiency
standards. In transport, efficient vehicles and incentives for behavioural
change are required. Consumers will gain with more
controllable and predictable energy bills. With smart meters and smart
technologies such as home automation, consumers will get more influence on
their own consumption patterns. Significant
efficiency can be achieved with action on energy use related resources such as
recycling, lean manufacturing and prolonging product time life.[15]

Investments by households
and companies will have to play a major role in the energy system
transformation. Greater access to capital for consumers and innovative
business models are crucial. This also requires incentives to change
behaviour, such as taxes, grants or on-site advice by experts, including the
monetary incentives provided by energy prices reflecting the external costs. In
general, energy efficiency has to be included in a wide range of economic
activities from, for example, IT systems development to standards for consumer
appliances. The role of local organisations and cities will be much
greater in the energy systems of the future.

An analysis of more ambitious
energy efficiency measures and cost-optimal policy is required. Energy
efficiency has to follow its economic potential. This includes questions on to
what extent urban and spatial planning can contribute to saving energy in the
medium and long term; how to find the cost-optimal policy choice between
insulating buildings to use less heating and cooling and systematically using
the waste heat of electricity generation in combined heat and power (CHP)
plants. A stable framework is likely to require further actions to save
energy, especially with a view to 2030.

(b)
Switching to renewable energy sources

The analysis of all
scenarios shows that the biggest share of energy supply technologies in 2050
comes from renewables. Thus, the second major pre-requisite for a more
sustainable and secure energy system is a higher share of renewable energy beyond
2020. In 2030, all the decarbonisation scenarios suggest growing shares of
renewables of around 30% in gross final energy consumption. The challenge for
Europe is to enable market actors to drive down the costs of renewable energy
through improved research, industrialisation of the supply chain and more
efficient policies and support schemes. This could require greater convergence in
support schemes and greater responsibilities for system costs among producers,
in addition to Transmission System Operators (TSO).

Renewables will move to the centre of the
energy mix in Europe, from technology development to mass production and
deployment, from small-scale to larger-scale, integrating local and more remote
sources, from subsidised to competitive. This changing nature of renewables
requires changes in policy parallel to their further development.

Incentives in the future, with increasing
shares of renewables, have to become more efficient, create economies of scale,
lead to more market integration and as a consequence to a more European
approach. This has to build on using the full potential of the existing
legislation[16],
on the common principles of cooperation among Member States and with
neighbouring countries, and possible further measures.

Many renewable technologies need further
development to bring down costs. There is a need to invest in new renewable
technologies, such as ocean energy and concentrated solar power and 2nd
and 3rd generation biofuels. There is also a need to improve
existing ones, such as by increasing the size of offshore wind turbines and
blades to capture more wind and to improve photovoltaic panels to harvest more
solar power. Storage technologies remain critical. Storage is currently often more expensive than additional
transmission capacity, gas backup generation capacity, while conventional
storage based on hydro is limited. Greater efficiencies in their use and
competitive costs require improved infrastructure for integration across Europe. With sufficient interconnection capacity and a smarter grid,
managing the variations of wind and solar power in some local areas can be
provided also from renewables elsewhere in Europe. This could diminish the need
for storage, backup capacity and baseload supply.

In the near future, wind
energy from the Northern Seas and the Atlantic sea basin can supply substantial
quantities of electricity with declining costs. By 2050 wind power provides
more electricity than any other technology in the High Renewables scenario. In
the medium term, the contribution of ocean energy can
provide an important contribution to electricity supply. Similarly, wind and solar power from the Mediterranean
countries could deliver substantial quantities of electricity. The opportunity
to import electricity produced from renewable sources from neighbouring regions
is already complemented by strategies to use the comparative advantage of
Member States e.g. such as in Greece where large scale solar projects are being
developed. The EU will continue encouraging and facilitating the development of
renewable and low-emission sources of energy in the Southern Mediterranean and interconnections
with European distribution networks. Further interconnection with Norway and
Switzerland will also continue to be critical. Similarly, the EU will look at
the potential of renewable sources provided by countries like Russia and
Ukraine (notably biomass).

Renewable heating
and cooling are vital to
decarbonisation. A shift in energy consumption towards
low carbon and locally produced energy sources (including heat pumps and
storage heaters) and renewable energy (e.g. solar heating, geothermal, biogas,
biomass), including through district heating systems, is needed.

Decarbonisation will
require a large quantity of biomass for heat, electricity and transport.
In transport, a mix of several alternative fuels will be needed to replace oil,
with specific requirements of the different modes. Biofuels will probably be a
main option for aviation, long-distance road transport, and rail where it can
not be electrified. Work to ensure sustainability (e.g.
on indirect land use change) is ongoing. The market
uptake of new bio energy which reduces demand for land necessary for food
production and which increases the net greenhouse gas savings (e.g. biofuels
based on waste, algae, forest residues), should
continue to be promoted.

As technologies mature,
costs will decrease and financial support can be reduced. Trade among Member
States and imports from outside the EU could reduce costs in the medium to
long-run. The existing targets for renewable energy appear to be useful for
giving predictability to investors while encouraging a European approach and
market integration of renewables.

(c) Gas plays a
key role in the transition

Gas will be critical
for the transformation of the energy system. Substitution of coal (and oil) with gas in the short to
medium term could help to reduce
emissions with existing technologies until at least 2030 or 2035. Although gas demand in the residential sector,
for example, might drop by a quarter until 2030 due to several energy
efficiency measures in the housing sector[17], it will stay high in other sectors such as the
power sector over a longer period. In the Diversified Supply Technologies scenario for
example, gas-fired power generation accounts for roughly 800 TWh in 2050,
slightly higher than current levels. With evolving technologies, gas
might play an increasing role in the future.

The gas market needs
more integration, more liquidity, more diversity of supply sources and more
storage capacity, for gas to maintain its competitive advantages as a fuel for
electricity generation. Long term gas supply contracts may continue to be
necessary to underwrite investments in gas production and transmission
infrastructures. Greater flexibility in price formula, moving away from pure
oil-indexation, will be needed if gas is to remain a competitive fuel for
electricity generation.

Global gas markets are
changing, notably through the development of shale gas in North America. With liquefied natural gas (LNG), markets have
become increasingly global since transport has become more independent from
pipelines. Shale gas and other unconventional gas sources have become
potential important new sources of supply in or around Europe. Together with
internal market integration, these developments could relax concerns on gas
import dependency. However, due to the early stage of exploration it is unclear
when unconventional resources might become significant. As conventional gas production declines, Europe will have to
rely on significant gas imports in addition to domestic natural gas production
and potential indigenous shale gas exploitation.

The scenarios are
rather conservative with respect to the role of gas. The economic advantages of
gas today provide reasonable certainty of returns to investors, as well as low
risks and therefore incentives to invest in gas-fired power stations.
Gas-fired power stations have lower upfront investment
costs, are rather quickly built and relatively flexible in use. Investors can
also hedge against risks of price developments, with gas fired generation often
setting the wholesale market price for electricity. However,
operational costs in the future may be higher than for carbon free options and
gas fired power stations might run for fewer hours.

If Carbon Capture and
Storage (CCS) is available and applied at large scale, gas may become a
low-carbon technology, but without CCS, the long term role of gas may be
limited to a flexible back-up and balancing capacity where renewable energy supplies
are variable. For all fossil fuels, Carbon Capture and Storage will have to be applied from around 2030
onwards in the power sector in order to reach the
decarbonisation targets. CCS is also an important
option for decarbonisation of several heavy industries and combined with
biomass could deliver "carbon negative" values. The future of CCS
crucially depends on public acceptance and adequate carbon prices; it needs to be sufficiently demonstrated on a large scale
and investment in the technology ensured in this decade, and then deployed from
2020, in order to be feasible for widespread use by 2030.

(d) Transforming other fossil fuels

Coal in the EU adds to a diversified energy
portfolio and contributes to security of supply. With the development of CCS
and other emerging clean technologies, coal could continue to play an important
role in a sustainable and secure supply in the future.

Oil is
likely to remain in the energy mix even in 2050and will mainly fuel parts of
long distance passenger and freight transport. The challenge for the oil sector
is to adapt to changes in oil demand resulting from the switch to renewable and
alternative fuels and uncertainties surrounding future supplies and prices.
Maintaining a foothold in the global oil market and keeping a European
presence in domestic refining – though one that is able to adapt capacity levels to the economic
realities of a mature market – is important to the EU economy, to sectors that depend on refined
products as feedstocks such as the petrochemical industry, and for security of
supply.

(e) Nuclear energy as an important
contributor

Nuclear energy is a decarbonisation
option providing today most of
the low-carbon electricity consumed in the EU. Some Member States consider the risks related to nuclear
energy as unacceptable. Since the
accident in Fukushima, public policy on nuclear energy has changed in some
Member States while others continue to see nuclear energy as a secure, reliable
and affordable source of low-carbon electricity generation.

Safety costs[18] and the costs for decommissioning existing
plants and disposing of waste are likely to increase. New nuclear technologies could help to address waste and
safety concerns.

The scenario analysis
shows that nuclear energy contributes to lower system costs and electricity
prices. As a large scale low-carbon option, nuclear energy will remain in
the EU power generation mix. The Commission will
continue to further the nuclear safety and security framework, helping to set a
level playing field for investments in Member States willing to keep the
nuclear option in their energy mix. The highest safety and security standards need to be
further ensured in the EU and globally, which can only happen if competence and
technology leadership is maintained within the EU. Furthermore, on a 2050
perspective, it will become clearer which role fusion power will be able to
play.

(f) Smart technology, storage and alternative
fuels

Whichever pathway is considered, the
scenarios show that fuel mixes could change significantly over time. Much
depends on the acceleration of technological development. It is uncertain which
technological options might develop, at what pace, with what consequences and
trade-offs. But new technologies bring new options in the future. Technology is an essential part of the solution to
the decarbonisation challenge. Technological progress can yield significant
cost reductions and economic benefits. Establishing energy markets fit for
purpose will require new grid technologies. Support should be given to research
and demonstration at industrial scale.

On the European level, the EU should
contribute directly to scientific projects and research and demonstration programmes, building on the Strategic Energy
Technology Plan (SET Plan) and the next Multiannual Financial Framework, and in
particular Horizon 2020, to invest in partnerships with industry and Member
States to demonstrate and deploy new, highly efficient energy technologies on a
large scale. A reinforced SET Plan could lead to cost optimal European research
clusters in times of tight budgets in Member States. The benefits of
cooperation are significant, going beyond financial support and building on
better coordination in Europe.

An increasingly important feature of the required
technology shifts is the use of information and communication technologies (ICT)
in energy and transport and for smart urban applications. This is leading to
the convergence of industrial value chains for smart urban infrastructure and
applications which need to be encouraged to secure industrial leadership. The digital infrastructure that will make the grid smart will also
require support at EU level by standardisation and research and development in
ICT.

Another area of
special importance is the shift towards alternative fuels, including
electric vehicles. This needs to be supported at European level by
regulatory developments, standardisation, infrastructure policy and further
research and demonstration efforts, particularly on batteries, fuel cells and
hydrogen, which together with smart grids can multiply the benefits of
electro-mobility both for decarbonisation of transport and development of
renewable energy. The other main options of alternative fuels are biofuels,
synthetic fuels, methane and LPG (Liquefied Petroleum Gas).

3.2.
Rethinking energy markets

(a) New
ways to manage electricity

There are national
constraints when choosing national energy mix. Our joint responsibility is to
ensure that national decisions are mutually supportive and avoid negative
spillovers. The cross-border impact on the internal market deserves renewed
attention. These create new challenges to power markets in the
transition to a low-carbon system providing a high level of energy security and
affordable electricity supplies. More than ever should the full scale of the internal
market be used. It is the best response to the challenge of decarbonisation.

One challenge is the need
for flexible resources in the power system (e.g. flexible generation, storage,
demand management) as the contribution of intermittent renewable generation
increases. The second is the impact on wholesale market prices of this generation.
Electricity from wind and solar has low or zero marginal costs and as their
penetration in the system increases, in the wholesale market spot prices
could decrease and remain low for longer time periods.[19] This reduces the
revenues for all generators, including those needed to ensure sufficient
capacity to meet demand when wind or solar are not available. Unless prices are
relatively high at such times, these plants might not be economically viable. This
leads to concerns about price volatility and for investors, about their ability
to recover capital and fixed operating costs.

Ensuring that market
arrangements offer cost-effective solutions to these challenges will become
increasingly important. Access to markets needs to be assured for flexible
supplies of all types, demand management and storage as well as generation, and
that flexibility needs to be rewarded in the market. All types of capacity
(variable, baseload, flexible) must expect a reasonable return on investment. It
is however important to ensure that policy developments in Member States
do not create new barriers to electricity - or gas - market integration[20].
Whether it concerns energy mix, market arrangements, long term contracts, support
for low-carbon generation, carbon floor
prices etc, the impacts on the internal
market, on which all increasingly depend, need to be considered. Now more than
ever, coordination is required. Energy policy developments need to take full
account of how each national electricity system is affected by decisions in
neighbouring countries. Working together will keep cost down and ensure
security of supply.

Building on the 3rd
internal energy market package, the Commission, assisted by the Agency for the Cooperation of Energy Regulators (ACER), will continue to ensure that the
regulatory framework stimulates market integration, that enough capacity
and flexibility are incentivized, and that the market arrangements
are ready for the challenges decarbonisation will bring. The
Commission is examining the effectiveness of different market models for
remuneration of capacity and flexibility and how they interact with
increasingly integrated wholesale and balancing markets.

(b)
Integrating local resources and centralised systems

New, flexible infrastructure
development is a "no regrets" option and could accommodate various pathways.

With electricity trade and
renewables' penetration growing under
almost any scenario up to 2050, and
particularly in the High Renewables scenario, adequate infrastructure at
distribution, interconnection and long-distance transmission becomes a matter
of urgency. By 2020 interconnection capacity needs to expand at least in line
with current development plans. An overall increase of interconnection capacity
by 40% up to 2020 will be needed, with further integration after this point.
For the successful further integration after 2020, the EU needs to fully
eliminate energy islands in the EU by 2015; in addition, networks have to be
expanded and come over time to synchronised links between continental Europe
and the Baltic region.

The implementation of
existing policies in the internal energy market and new policies, such as the
Energy Infrastructure Regulation[21], can contribute to allow the EU to meet this
challenge. The European 10-year planning of infrastructure needs by the ENTSOs[22] and ACER already
provides a longer term vision for the investors and lead to stronger regional
cooperation. The extension of current planning methods to a fully integrated
network planning for transmission (onshore and offshore), distribution, storage
and electricity highways for a potentially longer timeframe will be needed. CO2
infrastructure, that does not currently exist, will be required and planning
should be started soon.

To accommodate
renewable production locally, the distribution grid needs to become
smarter to deal with variable generation from many distributed sources such as,
in particular, solar photovoltaic, but also increased demand response. With
more decentralised generation, smart grids, new network users (e.g. electric
vehicles) and demand response, there is a greater need for a more integrated
view on transmission, distribution and storage. To exploit renewable
electricity from the North Sea and the Mediterranean, significant additional
infrastructure, notably subsea, will be needed. In the framework of the North
Seas Countries' Offshore Grid Initiative, ENTSO-E is already conducting grid studies
for North Western Europe with a 2030 horizon. This should feed into ENTSO-E's
work for a modular development plan of a Pan-European Electricity Highways
System up to 2050.

To support
decarbonisation in power generation and to integrate renewable energies,
flexible gas capacities at competitive prices are needed. New gas
infrastructures for interconnecting the internal market along the North-South
axis and linking Europe to new diversified supplies through the Southern
Corridor will be vital to foster the creation of well functioning gas wholesale
markets in the whole EU.

Between now and 2050,
there must be wide-scale replacement of infrastructure and capital goods throughout
the economy including consumer goods in people's homes. These are very
substantial upfront investments, often with returns over a long period. Early Research and Innovation efforts are necessary. A unified policy framework
that would synchronise all instruments from research and innovation policies to
deployment policies would support such efforts.

Massive investments are
needed in infrastructures. The increased costs of delay, particularly in the
later years, need to be highlighted, recognising that final investment
decisions will be influenced by the overall economic and financial climate[23]. The public sector
might have a role as a facilitator for investment in the energy revolution. The
current uncertainty in the market increases
the cost of capital for
low-carbon investment. The EU
needs to move today and start improving the conditions for financing in the
energy sector.

Carbon pricing can provide an incentive for deployment of
efficient, low-carbon technologies across Europe. The ETS is the
central pillar of European climate policy. It is designed to be technology
neutral, cost-effective and fully compatible with the internal energy market.
It will have to play an increased role. The scenarios show that carbon pricing
can coexist with instruments designed to achieve particular energy policy
objectives, notably research and innovation, promotion of energy efficiency and
development of renewables[24].
More coherence and stability is
however needed between EU and national policies for its price signal to
function properly.

A higher carbon price
creates stronger incentives for investment in low-carbon technologies, but may increase the risk of carbon leakage. Such carbon leakage is in particular a concern for those
industry sectors subject to global competition and global price patterns. Depending
on efforts of third countries, a well-functioning carbon pricing system should
continue to include mechanisms such as incentivizing cost-effective emission
reductions outside Europe and free allowances based on benchmarks to
prevent significant risks of carbon leakage.

Investment risks need
to be borne by private investors, unless there are clear reasons for not doing
so. Some investments in the energy system have a public good character.
Thus, some support for early movers may be warranted (e.g. electric cars, clean
technologies). A move towards greater and more tailored financing via public
financial institutions, such as the European
Investment Bank (EIB) or the
European Bank for Reconstruction and Development
(EBRD) and the mobilisation of the commercial banking sector in Member States
could also help to make the transition work.

Private investors will remain
most important in a market-based approach to energy policy. The role of utilities
could change substantially in the future, notably as regards investments.
While in the past, many generation investments could be done by utilities alone,
some argue that this is less likely in the future, given the scale of
investment and innovation needs. New long term investors need to be brought
in. Institutional investors could become greater players in the financing
of energy investments. Consumers will also play a more important role, which
requires access to capital at reasonable cost.

Support (e.g. energy subsidies) could continue to be
necessary beyond 2020 to ensure that the market encourages the development and
deployment of new technologies and will need to be
phased out as technologies and supply chains mature
and market failures are resolved. Public support
schemes in Member States should be clearly targeted, predictable, limited
in scope, proportionate and include phase-out provisions. Any support
measure has to be implemented in compliance with the internal market and the relevant
EU state aid rules. The process of reform must
continue to move rapidly to ensure more effective support schemes. In the longer
run, high value-added low-carbon technologies, in which Europe has leadership,
will positively effect growth and employment.

3.4 Engaging the public is
crucial

The social dimension of the energy
roadmap is important. The transition will affect employment and jobs, requiring
education and training and a more vigorous social dialogue. In order to
efficiently manage change, involvement of social partners at all levels will be
necessary in line with just transition and decent work principles. Mechanisms
that help workers confronted with job transitions to develop their
employability are needed.

New power stations and significantly more
renewable installations will have to be built. New storage facilities,
including for CCS, more pylons and more transmission lines are needed. Especially
for infrastructure, efficient permitting procedures are crucial since it is the
precondition for changing supply systems and move towards decarbonisation in
time. The current trend, in which nearly every energy technology is disputed
and its use or deployment delayed, raises serious problems for investors and puts
energy system changes at risk. Energy cannot be supplied without technology and
infrastructure. In addition, cleaner energy has a cost. New pricing mechanisms
and incentives might be needed but measures should be taken to ensure pricing
schemes remain transparent and understandable to final consumers. Citizens need
to be informed and engaged in the decision-making process, while technological
choices need to take account of the local environment.

The tools to respond to price increases by
improving energy efficiency and reducing consumption have to be in place,
especially in the medium term, when prices are likely to rise, no matter which
policies are followed. While greater control of and
reduced energy bills may be an incentive, access to capital and new forms of
energy services will be crucial. Vulnerable consumers in particular
might need specific support to enable them to finance necessary investments to
reduce energy consumption. This task will increase in importance with the
energy transformation being shaped in reality. A
well functioning internal market and energy efficiency measures are
particularly important to consumers. Vulnerable consumers are best protected
from energy poverty through a full implementation by Member States of the
existing EU energy legislation and use of innovative energy efficiency
solutions. As energy poverty is one
of the sources of poverty in Europe, the social aspects of energy pricing
should be reflected in the energy policy of Member States.

3.5 Driving
change at the international level

In the transition to
2050, Europe needs to secure and diversify its supply of fossil fuels while at
the same time develop cooperation to build international partnerships on a
broader basis. As Europe's demand develops away from fossil fuels, and
energy producers develop more diversified economies, integrated strategies with
current suppliers need to address benefits of cooperation in other areas such
as renewable energies, energy efficiency and other low-carbon technologies. The
EU should use this opportunity to strengthen its cooperation with its
international partners, in line with the new agenda set in September 2011[25]. It will be
important to manage the transition in close partnership with the EU's energy
partners, notably our neighbours, such as Norway, the Russian Federation, Ukraine,
Azerbaijan and Turkmenistan, the Maghreb and the Gulf countries while gradually
establishing new energy and industrial partnerships. This is for instance the
purpose of the EU-Russia 2050 Energy Roadmap. Energy is also an important
contributor to development policy due to its multiplier impact on developing
countries' economies; continued work for universal access to energy is needed
worldwide.[26]

The EU needs to expand and diversify links
between the European network and neighbouring countries with a particular focus
on North Africa (with a view to best
harness the solar energy potential of the Sahara).

The EU also needs to
address the import of carbon-intensive energy, notably electricity. Enhanced
cooperation towards creating a level playing field
concerning market and carbon regulation is needed, especially for the power
sector, while trade increases and the issue of carbon leakage comes to the
fore.

4.
The Way Forward

The Energy Roadmap 2050 shows that decarbonisation
is feasible. Whichever scenario is chosen, a number of "no
regret" options emerge which can bring down emissions effectively and in
an economically viable way.

Transforming the
European energy system is imperative for reasons of climate, security and the
economy. Decisions being taken today are already shaping the energy system of
2050. To make the necessary transformation of the energy
system in time, the EU needs much greater political ambition and a greater
sense of urgency. The Commission will discuss with
other EU institutions, Member States and stakeholders on the basis of this
Roadmap. The Commission will update it regularly, reassessing what is
necessary in the light of progress and changes and envisages an iterative
process between Member States, through their national policies, and the EU, resulting
in timely action to achieve an energy system transformation which delivers
decarbonisation, greater security of supply and increased competitiveness for
the benefit of all.

The overall system costs of transforming
the energy system are similar in all scenarios. A
common EU approach can help keep costs down.

Energy prices are
rising world-wide. The Roadmap demonstrates that while prices will rise until
2030 or so, new energy systems can lead to lower prices after that. Distortions
to the internal energy market, including through
artificially low regulated prices, should be avoided, since they would send wrong
signals to markets and removing incentives for energy savings and other
low-carbon investments – this would hold back the transformations which will
ultimately bring prices down in the long-run. Society needs to be prepared for and
adapt to higher energy prices in the coming years. Vulnerable customers and
energy-intensive industries may need support in a transitional period. The
clear message is that investments will pay off, in terms of growth,
employment, greater energy security and lower fuel costs. The transformation creates
a new landscape for European industry and can increase competitiveness.

To achieve this new energy system, ten conditions
must be met:

(1)
The immediate priority is to
implement fully the EU's Energy 2020 strategy. All existing legislation
needs to be applied, and the proposals currently in discussion, notably
on energy efficiency, infrastructure, safety and international cooperation, need
to be adopted swiftly. The path towards a new energy
system also has a social dimension; the
Commission will continue to encourage social dialogue and social partners'
involvement to help a fair transition and an efficient management of change.

(2)
The energy system and society as a whole need to
be dramatically more energy efficient. The co-benefits of achieving
energy efficiency in a wider resource efficiency agenda should contribute to
meeting the goals in a faster and cost-efficient manner.

(3)
Particular attention should continue to be given
to the development of renewable energy. Their rate of development,
impact in the market and rapidly growing share in energy demand call for a
modernisation of the policy framework. The EU's 20% renewable energy target has
so far proven an efficient driver in development of the renewable energy in the
EU and timely consideration should be given to options for 2030 milestones.

(4)
Higher public and private investments in R&D
and technological innovation are crucial in speeding-up the commercialisation
of all low-carbon solutions.

(5)
The EU is committed to a fully integrated market
by 2014. In addition to technical measures already identified, there are regulatory
and structural shortcomings which need to be addressed. Well-designed market
structure instruments and new ways of cooperation are required for the internal
energy market to deliver its full potential as new investments are coming into
the energy market and the energy mix is changing.

(6)
Energy prices need to better reflect costs, notably of the new investments needed throughout the energy
system. The earlier prices reflect costs, the easier the transformation will be
in the long run. Special attention should be paid for the most
vulnerable groups, for which coping with the energy system transformation will
be challenging. Specific measures should be defined at national and local
levels to avoid energy poverty.

(7)
A new sense of urgency and collective
responsibility must be brought to bear on the development of new
energy infrastructure and storage capacities across Europe and with
neighbours.

(8)
There will be no compromise on safety and
security for either traditional or new energy sources. The EU must continue to
strengthen the safety and security framework and lead international
efforts in this field.

(9)
A broader and more coordinated EU approach to international
energy relations must become the norm, including redoubling work to
strengthen international climate action.

(10)
Member States and investors
need concrete milestones. The Low carbon economy roadmap has already indicated
greenhouse gas emission milestones. The next step is to define the 2030 policy framework, reasonably
foreseeable and the focus of most current investors.

On this basis, the
Commission will continue to bring forward initiatives, starting with comprehensive
proposals on the internal market, renewable energy and nuclear safety next
year.

[1] European Council, October 2009.

[2] COM(2011)112, 8 March.

[3] COM(2011)144, 28 March.

[4] Extraordinary European Council, 4 February 2011

[5] European Council, 8/9 March 2007: By 2020, at least 20 % reduction in greenhouse gas emissions
compared to 1990 (30% if international conditions are right, European Council, 10-11 December 2009); saving of 20 % of EU
energy consumption compared to projections for 2020; 20 % share of renewable
energies in EU energy consumption, 10% share in
transport.

[6] See also "Energy 2020 -
A strategy for competitive, sustainable and secure energy" COM(2010) 639,
November 2010.

[7] IEA (2011), World Energy Outlook 2011.

[8] The model used for this purpose is the PRIMES energy
system model.

[9] See annex "Selected Stakeholders'
Scenarios", including scenarios of the International Energy Agency,
Greenpeace/EREC, the European Climate Foundation and Eurelectric. Further
studies and reports have been closely analysed, such as e.g. the independent
report of the Ad hoc Advisory Group on the Energy Roadmap 2050.

[10] These uncertainties include
among others the pace of economic growth, the extent of global efforts to
mitigate climate change, geopolitical developments, the level of world energy
prices, the dynamics of markets, the development of future technologies, the
availability of natural resources, social changes and public perception.

[11] European societies might need
to rethink the way energy is consumed, e.g. by changing urban planning and
consumption patterns. See Roadmap to a Resource Efficient Europe (COM(2011)
571).

[12] For details on the scenarios see Impact Assessment.

[13] Energy system costs today and 2050 are not directly
comparable. While the renovation costs enter fully into the cost accounting,
increasing house values relate to assets and capital stock considerations that
are not part of the energy analysis. As vehicle costs covered cannot
distinguish between energy-related and other costs, they are upper estimates.

[14] For example, it is estimated that electricity prices in
Europe is 21% more expensive than in the United States or 197% more expensive
than in China.

[15] For example, more than 5000
Petajoules of energy could be saved in the EU (more then three year consumption
of energy in Finland (SEC (2011) 1067).

[16] Directive 2009/28/EC on the promotion of the use of
energy from renewable sources.

[17] On the other hand, gas heating may be more energy
efficient than electric heating or other forms of fossil fuel heating, implying
that gas may have growth potential in the heating sector in some Member States.

[18] Including
those resulting from the need to increase the resilience to natural and
man-made disasters.

[19] This situation is not addressed in the scenarios: in
the modelling the pricing mechanism is designed so that investors are fully
remunerated (full cost recovery via electricity prices) leading to an increase
in electricity prices in the long-run.

[20] Full market integration by
2014, as decided by the European Council on February 4th, 2011,
supported by infrastructure developments and technical work on Framework
Guidelines and Network Codes

[21] Proposal for a regulation on guidelines for
trans-European energy infrastructure (COM(2011) 658) and proposal for a
regulation establishing the Connecting Europe Facility (COM(2011) 665).).

[22] European Network of Transmission System Operators.

[23] Scenarios for the Low Carbon Economy Roadmap of March
2011 show the additional costs of delayed action. Also, the IEA (2011) World
Energy Outlook 2011 argues that on a global level, for
every $1 of investment avoided in the power sector before 2020 an additional
$4.3 would need to be spent after 2020 to compensate for the increased
emissions.

[24] The CPI scenario results in a carbon value of some 50€
in 2050, the decarbonisation scenarios substantially more.

[25] Communication on security of energy supply and
international cooperation (COM(2011) 539).

[26] "Increasing the Impact of EU Development Policy:
an Agenda for Change" (COM(2011)637, 13 October).